In February, I had the idea to write about the market being in “bear” territory as the ASX 200 Accumulation Index had dropped 20% (to 4800 points) since its recent peak (very nearly 6000 points in April 2015). Even though it is an arbitrary number, this is generally considered a bear market. I even had this incredibly witty title “Bear Season Opens” and had planned to write about what previous bear markets looked like and how long they lasted.
A few weeks later, however, that idea would have been made redundant as the market had recovered to over 5200 points – about 8% up. And if it continues going up I might consider writing another article titled something like “Bull season opens”.
So are we still in a bear market?
The answer is it doesn’t matter. Sound, long term investing is based on acquiring a company with solid fundamentals, a good track record, forecast earnings growth, and will continue making excellent profits well into the future.
There is a famous quote that has been attributed to Henry Poor, John D Rockefeller, and J.P. Morgan, that, when asked what will the market do in the future, the response was simply: “It will fluctuate”.
Never a more accurate prediction of the future has ever been made. The market has always fluctuated and it will continue to fluctuate. Take a look at the market movements since September 2015.
It was Benjamin Graham, the father of value investing that said in his book The Intelligent Investor “in the short term the market is a voting machine, and in the long term it is a weighting machine.” What he meant by this is in the short term the market will tell you what is popular and the individual share prices (and the market in general) will reflect the current market sentiment.But an excellent company will power on in any conditions, and even though their stock price may follow the market trend in the short term, the true value of the company will be realised in the long term.
But over time, as profits continue to flow, and growth continues to occur, it doesn’t matter what happens to the market in the next few months, what actually matters is what happens to earnings in the next 10 years.
Even when the financial world went into meltdown during the Global Financial Crisis (GFC), it still just looks like a blip on the radar of the last 50 years. Yes, a lot of people lost a lot of money, but only those that sold at the bottom. And those that recognised the companies that continued to earn good profits despite stock prices crashing saw the GFC as a buying opportunity and made a lot of money.
This is not an article on when to buy and when to sell, because trying to time the market is a fool’s game. But the point is that a great company – the sort of company we look for at Farnam – can weather any storm when they have good insulation and good protection from external market forces.
Being recession proof is one tenet that makes a business great. Download our entire Value Investing Checklist for a complete view of our investment process.